#9062 - Contractual Defects - Contracts Law

TOPIC 4: CONTRACTUAL DEFECTS

K defects provide for defences in a lawsuit. A contract can be rendered ineffective if these deficiencies are proven. There are five types of defects:

PART 1: INCAPACITY TO CONTRACT

One must have the capacity to legally give consent in contractual dealings; otherwise there is no consensus ad idem. The idea is that the law is using mechanisms to protect people against exploitation. Minors, mentally disabled persons, intoxicated persons, corporations, associations, Indian Bands/Aboriginal peoples and public authorities have no or limited capacity to create a contract.

a) Minors

• For minors, the age of majority is the age at which a person is held fully accountable in law and minors are those that have not reached that age (depends on jurisdiction); this may apply even if minor looked older

• K is either enforceable or avoidable (*distinct from one that is void, which essentially does not exist)

• Process for avoidance includes: 1) option to accept/avoid, 2) choice must be made soon after reaching majority age otherwise ability to avoid lost 3) must return benefits if choosing to avoid 4) lose ability to K if affirmed by some means

• Some K’s cannot be avoided (ex. for food, clothing, education, legal advice)

Toronto Maboro Major A Hockey Club v Tonelli 1977 (ON CA)

Facts: DF contracted with PL for midget hockey league for 3 years at age of 17. Became pro and Houstan Aeros wanted to sign so he wanted to terminate with PL which would have entitled them to 20% of K with Aeros.

I: Can DF void K with PL?

D: yes

Ratio: While a minor can enter binding employment contracts, they must be made for benefit of minor.

Reasons: K not made for benefit of minor. Club had exclusive ability to terminate him, and court considered length and remuneration received under K. As a result, he was able to void it at his will.

b) Mental Incapacity

• If court has declared a person to lack mental capacity, their K is void and cannot be enforced at all (even if no declaration by court, this is possible)

  • Generally done by way of judicial declaration; issue will be whether the other person knew about incapacity

  • Where non-judicial declaration comes up is where the necessity of life matters kick in

• Voidable only if other person recognized problem of mental incapacity

c) Intoxication

• For a K to be void: 1) The person must be so drunk that they could not appreciate what they were doing or 2) the other party must have been alerted to the fact

  • It must be avoided promptly

• There must be a prompt election to avoid K while sober (failure to do so = affirmation of agreement)

NOTE: in the case of uncertainty regarding capacity, one could require written representation that indicates they have capacity to sign; if they argue otherwise, there may be an action against for tort of misrepresentation.

McLaren v McMillan (1907) Man KB

Facts: Pl was drinking heavily throughout the day and was approached by horse trader who wanted to offer share in pony.

I: Can PL render K void?

D: no

Ratio: Intoxication can give rise to contractual defect where there is an excessive state of inebriation, rather than mere excitement.

Reasons: PL’s state was troubled by ability to reason, but he was still able to reason so he should not be able to avoid K liability.

d) Business corporations

• Corporations are treated like legal persons – there is a difference between a chartered corporation and statutory corporation

  • Chartered – treated like someone having reached age of majority

  • Statutory – have a more limited contractual capacity (if acting ultra vires, agreement is unenforceable)

e) Associations

• Unincorporated business organizations including private clubs, charities and religious societies

• Most do not hold legal existence and are incapable of contracting (Nesbitt v Vander Kooi 2003 BCSC), but some do through statutory authority (Ex. education religion, charity, trade union, etc).

• An individual from an association can contract for its benefit but assumes all legal liability

f) Indian Bands and Aboriginal Persons

• Indian bands do have legal capacity (Indian Act defines bands as group of Aboriginal people whose land and money are held by the Crown) – similar capacity to corporations

• Same is not true of individual persons under Indian Act – there are restrictions on contractual ability in relation to reserve land

  • S. 28: any deed, lease, K, instrument, document or agreement purporting to permit a person other than member of band to occupy reserve must be approved by Crown, otherwise it is void

g) Public authorities: generally has the freedom to contract acting on behalf of a government body, independent of statutory authority. Limitations are those listed under division of powers in CA, 1867

PART 2: ABSENCE OF WRITING

Some contracts must be in writing according to the Statute of Frauds or under Consumer Protection Legislation and can otherwise be rendered unenforceable. Statute of Frauds was an attempt to reduce the risk of fraud by keeping Ks in writing. Contracts that must be in writing according to Statute of Frauds 1677 include: guarantees, Ks for sale of an interest in land, and contracts not to be performed within a year.

1. Guarantee (CONDITIONAL): promise by third party called guarantor to satisfy debtor’s obligation if debtor fails. Provides a conditional promise: if X is unable to pay, I will.

2. Indemnity (UNCONDITIONAL); promise to assume another’s debt completely (ex. your mom is guarantor on overdraft protection, but when you default, they go straight to her instead of you)

Depending on provinces, SF applies to some guarantees, but not indemnities which requires writing, although some can enforce indemnity agreements orally.

The statute will require a note or memorandum as long as it 1) provides evidence of essential elements of K (name, signature subject matter) and 2) is signed by party against whom it’s enforced (Courts can be lenient).

PART 3: MISTAKE

Sometimes the effect of misrepresentation is to induce a mistake. Two mistakes prevent creation of a contract: mistaken identity and mistake as to subject matter. With mistaken identity, courts will render contract defective if:

1) mistake known to other contractual party and

2) mistake was material (matters significantly).

With mistake as to subject, the K can be avoided if there was no agreement on the subject because there was no consensus and no true agreement. Mistakes can regard the existence of the subject matter (court will look to the belief of subject matter). If the subject matter:

• Ceased to exist after K created, it’s a question of frustration and not mistake

• Ceased to exist before K created, it’s mistake

In order to avoid mistake, a force majeure clause can be used to assign hardship on party signing if subject matter of K destroyed or something unexpected happens. Affected party can take out insurance for protection.

With frustration, parties have made an erroneous assumption about the future and subsequent events make it impossible to perform because the purpose has been radically undermined. Elements include:

• Must take place after K formation

• Applies if neither party is responsible for event (if 1 is, they pay loss)

Mistakenly signing a document in error can be irrelevant because of being

bound by signature.

Exception 1: Onerous terms that are not brought to the attention of the person signing may not make K binding.

Exception 2: Non est factum: this is not my deed; allows party to avoid obligations if there is a fundamental, total or radical difference between what a person signed and what that person thought they were signing. This has a high threshold and is difficult to meet because if it’s just misrepresentation, it can be voidable, not void. Not carefully reading it does not warrant this defence.

Shogun Finance v Hudson 2004 (HL)

Facts: PL entered K with fraudster posing as Mr Patel and offering to finance purchase on a vehicle. When they ran credit check, it appeared good, and he possessed the vehicle, then selling to innocent third party. When fraudster didn’t pay PL, PL tried to repossess.

I: Was there a K between PL and fraudster?

D: no; PL owns vehicle

Ratio: Where there is no meeting of the minds as a result of fraud, there is no contract.

Reasons: There was no meeting of the minds between PL and fraudster – there was no intension that the fraudster would finance the vehicle.

Performance Industries Ltd v Sylvan Lake Golf & Tennis 2002 SCC (unilateral mistake)

Facts: O’Connor signed agreement with Bell re: double row housing development on 11 acres, which ended up only being 3.6 acres on K. Bell did not read the K in its entirety, but assumed the agreements were made based on oral discussions.

I: Was there a non est factum?

D: yes; restitution rendered for Bell for 600 000 and written agreement consistent with oral agreement

Ratio: Restitution is available so long as 1) mistaken party can establish that terms agreed to orally were not accurately reflected in document 2) other party knew or ought to have about error...